Consistent with its stance from 2021 to 2023, the Internal Revenue Service (IRS) has announced, via Notice 2024-35[1], that penalties will not be imposed on taxpayers who fail to take the required minimum distributions (RMDs) from most individual retirement accounts (IRAs) and defined contribution plans inherited from decedents who passed away post-2019.

The Proposed Regulations released in 2022, addressing the amended RMD regulations for IRAs and defined contribution plans as instituted by the SECURE Act, stipulated that taxpayers inheriting an IRA or defined contribution account from an individual who passed away after 2019, and who had reached their required beginning date for distributions, were mandated to receive distributions based on the life expectancy of the designated beneficiary. This was to occur each year for the nine years following the decedent's death, with the total remaining balance to be distributed by the end of the tenth year.

Several advisors interpreted the amendments in the SECURE Act as superseding the necessity for distributions within the initial nine-year period, even if the decedent had reached their required beginning date before death. In acknowledgment of these interpretations, the IRS published Notices 2022-53 and 2023-54, exempting taxpayers from penalties for non-compliance with these distribution requirements for years 2021-2023, irrespective of whether the final regulations would uphold such obligatory distributions within the first nine years.

The IRS has now extended this relief to cover 2024 specified distributions as well. Section IV.C of the Notice provides the following definition of a specified distribution:

For purposes of this notice, a specified RMD is any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to §401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of §401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

a designated beneficiary of an employee under the plan (or IRA owner) if: (1) the employee (or IRA owner) died in 2020, 2021, 2022, or 2023, and on or after the employee’s (or IRA owner’s) required beginning date, and (2) the designated beneficiary is not using the lifetime or life expectancy payments exception under §401(a)(9)(B)(iii); or
a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to §401(b)(5) of the SECURE Act) if: (1) the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and (2) that eligible designated beneficiary was using the lifetime or life expectancy payments exception under §401(a)(9)(B)(iii) of the Code.[2]

The Notice clarifies that a defined contribution retirement plan shall not be deemed noncompliant with the distribution provisions outlined in Internal Revenue Code (IRC) §401(a)(9) due to a failure to execute a specified distribution in 2024. Furthermore, the Internal Revenue Service (IRS) will not enforce the excise tax imposed under IRC §4974 for neglecting to take the required minimum distribution against beneficiaries for any specified distribution not taken in 2024.[3]

In contrast to the previous Notices, the current Notice does not state that penalties for distributions will commence no earlier than the subsequent year, which would be 2025 in this instance. Such omissions have historically left the applicability of penalties in the following year ambiguous, with the IRS not specifying its expectations regarding the enforcement of these rules for distributions in that year. And, in fact, such penalties have not applied in those subsequent years.

Instead, the current Notice indicates that the final regulations are projected to be applicable for determining required minimum distributions (RMDs) for calendar years starting from January 1, 2025.[4] Consequently, it is prudent for taxpayers to operate under the assumption that distributions are likely to be mandated for the tax year 2025 and beyond.

[1] Notice 2024-35, April 16, 2024, https://www.irs.gov/pub/irs-drop/n-24-35.pdf (retrieved April 17, 2024)

[2] Notice 2024-35, April 16, 2024

[3] Notice 2024-35, April 16, 2024

[4] Notice 2024-35, April 16, 2024